American politics

How to save Obama’s second term

Despite the rancour over scandals, big reforms are still possible

PRESIDENTS often have no choice but to react to events. When a giant tornado struck a suburb of Oklahoma City on May 20th, Barack Obama declared a disaster and ordered the federal authorities to help search for survivors. As emergency workers pulled children from the rubble, the mudslinging in Washington, DC, paused. But only for a moment. Mr Obama is still beset by scandals. Republicans berate his administration for a “cover-up” after terrorists murdered diplomats in Benghazi; for snooping on journalists; and for letting the Internal Revenue Service (IRS) hound conservatives.

Not all these scandals are real. In Libya the administration failed to anticipate an attack or to protect its staff: a tragic failure, but not a crime. Spin-doctors tied themselves in knots to avoid saying anything that might hurt the president’s re-election campaign, but that is what spin-doctors do. The snooping scandal is murkier, and seems to have involved an abuse of power. But the IRS scandal is unambiguously outrageous.

Tax officials singled out the president’s opponents for extra scrutiny. Conservative groups seeking tax-exempt status were subjected to long delays and intimidating questionnaires; liberal groups, less so. Mr Obama did not order this, but it still damages him. How can he persuade Americans of the virtues of bigger government if even the IRS is politically biased?

The perils of paralysis

The danger is that Mr Obama will achieve little in his second term. Congress remains gridlocked. Democrats and Republicans could spend the next four years squabbling and issuing subpoenas. To avoid this, Mr Obama needs to keep his eyes on the big picture. Even as Republicans pepper his administration with probes, he needs to keep pushing for solutions to America’s main domestic problems. He may believe it is impossible to work with congressional Republicans, but his legacy depends on him trying. He will lose leverage if he delays. Next year Washington’s attention will be on the mid-term elections; after that Mr Obama will be a lame duck.

Three areas offer big long-term pay-offs and grounds for bipartisan co-operation: immigration, entitlements and tax reform. On immigration, the ball is already rolling: a bill made it through a Senate committee on May 21st. Centrists in both parties understand the economic benefits of allowing more foreign brains and hands into the country. They also see benefits for their own parties: Republicans want to stop alienating Hispanics; Democrats want to extend citizenship to millions of likely Democratic voters. A lot could still go wrong, but with a push from both parties a deal is possible.

Taxes will be harder. Republicans want to cut them; Democrats think the government needs more cash. On one thing, however, both sides can agree: the tax code is too complex (see article). Tax compliance wastes 3m man-years each year. One reason why the IRS scandal strikes such a chord is that so many Americans are terrified of the taxman. Few can be sure that they have not broken some rule or another. More important, a tax code full of loopholes is inefficient and regressive: it encourages too much consumption of some things (home-ownership, health spending) and deters others (such as work) through higher marginal rates; and the lion’s share of the tax breaks goes to richer Americans. Corporate-tax rules are an utter mess, as the row over Apple’s taxes illustrates (see article).

Two lawmakers are trying to reform the code: Dave Camp, a Republican, and Max Baucus, a Democrat. Mr Obama should lend his weight to their efforts. Ideally, they would start afresh with no loopholes and much lower rates. Republicans should love this: if Congress were to scrap all loopholes and deductions, it could nearly halve income-tax rates and still raise the same amount of money. Democrats should like it, too: a more efficient tax system would let them pay for the same amount of government with less drag on growth. The snag is that voters define “loopholes” as other people’s tax breaks. Their own, they rather like. Getting rid of particular boondoggles such as the mortgage-interest deduction may prove impossible. But capping the overall amount of deductions any individual can take should not be, so long as both parties have their fingerprints on the bill, thus sharing the credit and the blame.

Grasping the third rail together

Democrats would like tax reform to raise more revenue. Republicans might agree if it is tied to an even bigger reform: making entitlements sustainable. This will be hardest of all. Social Security (public pensions), Medicare (health care for the old) and Medicaid (health care for the cash-strapped) are immensely popular. Politicians who mess with them tend to lose their jobs. And the nation’s finances are less alarming than they were in 2009. The budget deficit has been roughly halved, and health-care inflation has fallen. All this makes it harder to persuade voters that fixing entitlements is urgent.

Yet it is. Reforms will take years to have an effect, so they need to start now. Otherwise as Americans age the cost of pensions and health care will eventually crowd out other public services and imperil the nation’s fiscal health. Our memo offers some suggestions for averting this calamity. The details matter less than a couple of broad principles. First, as people live longer, they should work longer (we suggest America’s retirement age could gradually rise to 70). Second, for all the hot air about “death panels”, the cost- effectiveness of a health-care system matters. More than perhaps any government in the world, America’s pays doctors to do stuff, rather than keep people well. That has to change.

Mr Obama cannot solve any of this alone. Offer the Republicans too little and they will scaremonger from the sidelines. So he should be bold. He could offer to raise the age of eligibility and expand means-testing for Medicare and push more people off disability benefits and into work. This may not bring enough Republicans on board, but the only way to find out is to try. Letting in dynamic immigrants, revamping the tax code and reforming entitlements would make the Great Society safe for another generation. Not enough to get Mr Obama’s face carved on Mount Rushmore, but not bad.